Catch Ups Not Catching on

January 15, 2002 (PLANSPONSOR.com) - The "catch up" provision of the recent tax law may be a great idea, but countless numbers of Americans probably won't be able to take advantage of it, the Chicago Tribune reports.

Some 401(k) plan sponsors may be reluctant to offer those over 50 higher savings limits because they would then be required to give the same to their entire workforce.

That would be problematic because if the company had previously offered elective savings opportunities only to managers, it would now have to do that with everyone, according to the Tribune.

Some States Not in the Game

And some states, notably California with its huge workforce and hefty state income tax, aren’t yet adopting the federal limits.

In fact, employers in the nearly two dozen states that do not automatically conform to federal laws could find themselves in deep water if those states try to collect income tax on the higher amounts.

National companies – particularly those with recent acquisitions – may also face recordkeeping problems when trying to enforce different tax regulations in different places.

Not surprisingly, consultant Hewitt Associates found in a survey that 40% of employers will wait at least until the second half of 2002, or later, to implement the higher limits.


The catch-up provisions, which took effect January 1, allow workers 50 and older to put away $1,000 more this year than the new $11,000 tax-deferred contribution limit.

That $1,000 rises to $5,000 in 2006. That means older employees can put in a total of $20,000, because the overall base rate will increase each year, too, to $15,000.

The extra money could give workers a nest egg worth 40% more at age 70 than one with contributions at the 2001 limits – and nearly 20% higher than one with contributions at the new maximums that fails to take advantage of the catch-up provisions, according to estimates by the Vanguard Group.

 

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